After 20 years as a director, these are the red flags I look for

19 Mar, 2018

Tolstoy said that “happy families are all alike; every unhappy family is unhappy in its own way,” but the same cannot be said for boards. They are all vulnerable to the same unhappy circumstances if red flags aren’t avoided.

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Tolstoy said that “happy families are all alike; every unhappy family is unhappy in its own way,” but the same cannot be said for boards. They are all vulnerable to the same unhappy circumstances if red flags aren’t avoided.

In my twenty years of being a professional company director, there are the four red flags I watch out for. If any of these behaviours are present, I know we’re in for a potentially rocky ride.

1. Lack of a real relationship between management and the board

When management understands and respects the role of the board, I gain confidence that the organisation understands the foundations of good corporate governance. Unfortunately, sometimes that doesn’t occur. Whether it’s because management doesn’t understand the role of the board, or thinks the board is irrelevant or out of touch, the result is a lack of transparency.

The board are only occasional visitors to an organisation, we don’t work within the business every day. But the devil is in the detail, and the board is reliant on management for information. Boards need to receive information that’s thorough and timely so they can make decisions ahead of opportunity or disaster.

Sometimes management wants to show themselves in a good light, which is understandable. But if they’re glossing over the details, or pushing the upside of a situation and denying the downside, the board is disabled by that. There must be enough trust and mutual respect to allow the board and management to work collaboratively. Boards have to earn that respect - but management has, equally, to be open to it.

2. A dominant CEO or chair

A red flag I’ve seen more than once is the dominant CEO or chair. Either can shut down discussion and prevent the transparency of information that characterises good governance.

A good chair is paramount in enabling the contribution of each of the directors and encouraging a collaborative approach. By contrast, a dominant or bullying chair can shut down discussion and make people fearful of asking the questions to which the board needs answers. When discussions are disabled, even the most talented board is bound to feel a lot of frustration.

So the power of the chair is absolutely critical in good governance and in successful organisations. But it’s not just the chair’s behaviour that can make or break a successful organisation: a dominant CEO is also a big red flag for me.

On ASX boards, we increasingly expect the senior management team to regularly address the board. This allows the board to direct questions to the person with direct responsibility for the area. Where I encounter CEOs who insist that all questions have to go via them, I feel very anxious that I’m not getting the full story. My immediate instinct is to dig deeper.

Once again, transparency plays a vital role in the trusting relationship between board and management, and a CEO can facilitate that or put barriers in its way.

3. Hero culture

I remember serving on a board and learning that the audit team had pulled an all-nighter in order to get the annual accounts done. They were proud of their efforts, but to me it was a huge red flag. Where a team is working all night, it indicates that the system and processes are failing.

Likewise, when a CEO or management team is working around the clock to put together that exhausting new deal that has everyone’s blood running hot, it indicates to me that heroics and adulation have overtaken good process. Those adrenalin-laced efforts might not be as based in sound economics or strategy as they should be. I’ll take sensible, sober, decision making over the desire to do something spectacular every time.

4. Lack of meaningful strategy

Too often, strategy days consist solely of the various divisions of the company delivering their budget for the next year. If the strategy is merely these budgets added together in a PowerPoint document, the company doesn’t have a strategy.

Good strategy is much more than a bottom up process of adding up budgets. Good strategy is about engaging with the challenges and risks that lie ahead. It’s about deep examination of the business that you’re really in, and the reason the organisation exists.

To enable this the board must have a chance to engage with the company’s strategy, and to put challenges to management. There’s nothing wrong with looking for efficiencies and productivity benefits, of course, but that’s not the only aspect of strategy. If you show me an organisation that is dominated solely by next year’s bottom line, I’ll show you an organisation that is unlikely to exist in 10 years time.

What are your red flags?

I’d love to hear the thoughts of other directors from The Resolution community – what red flags do you look for when joining a board?